S&P 500 ValuationThe Shiller S&P 500 CAPE (10-year price earning ratio adjusted for inflation) is the reference to assess whether the S&P 500 is undervalued or overvalued over long period of time. Here's what it looks like now:
The CAPE stands at 22.77 vs 21.14 over a year ago, so by this metric the S%P 500 is even more overvalued than last year. Although it's still much lower than the CAPE in 2000, it's still high compared to historical CAPE, and at the level of previous tops in the stock market (1901, 1929 and 1966).
Many analyst like to look at the short term, and show that forward PE ratio is only about 14, and use this number to explain stocks are a pretty good bargain right now. In 2007, we had the same rhetoric, as forward PE were low because of high coportate earning, that were widely above their long term trend.
Based on the 2 metrics above, the conclusion is the same as last year and it appears that based on valuation investing in the S&P 500 for the next several years might not be the best of ideas, or least it's rather risky.
US Market Investors SentimentBased on last week AAII sentiment survey, investors are moderately bullish for the next 6 months.
identify some of the optimistic (and market) peaks of the past. The rule goes as follows: If the 14-week moving average of the AAII "Bullish" sentiment index is at 30% or below there could be a long term buying opportunity, above 50% there could be a long term sell opportunity.
Now this is getting interesting, as sentiment is pretty bullish, and AAII-14 getting closer to the 50% mark, even though it's not quite there for now.
S&P 500 TechnicalsWe are now going to have a look at some technical indicators namely RSI-14 and NYA200R, as well as draw trend lines on the S&P 500 to see what it might do in the short term.
The chart above (Yahoo Finance) is the 6 month chart of the S&P 500 with RSI-14, and we've been around 80 for a little while, which means the market is oversold in the short term.
NYA200R shows over 83% of stock are above their 200-day moving average, which is not very bullish for stocks either
We seem to have reached the top of the trend started since 2010, so a correction (at least in the short term) could occur very soon.
ConclusionIn the short term, all indicators shown above are bearish since they all indicate the market is overbought, so it's prudent to own less US stock at the moment, and traders may also consider shorting for the next few weeks/months.
In the long term, the S&P 500 is overvalued by all measures, but market participant is not extreme just yet, so there could be a short term correction, followed by a rally before stocks head south for a longer period of times. Alternatively, it's also possible positive sentiment carries on the S&P 500 to new highs, and the long term reversal comes earlier than expected.